Hold onto your hat, we’re in for a wild ride

James Turk interviews Doug Casey, the American-born economist, professional investor, author and advocate of the free market, in an illuminating, entertaining and yet ultimately chilling interview from November 2011.

For those of you with busy lives who don’t have the time to sit through an hour of Casey’s sage-like wisdom, this wide-ranging chat with one of the world’s foremost investors covers some key areas of vital importance to the Cobden Centre – namely the role of government and chiefly central banks in causing current and past crises.

On a side note, Casey’s clear thinking on what constitutes a strong economy is particularly timely as the Bank of England’s Governor, Sir Mervyn King, has rejected blame for the financial meltdown and instead lambasted banks that had “grown too quickly and borrowed too much”. He fails to acknowledge the role played by the Bank in creating the crisis – apparently a central interest rate never higher than 6% since 2000 despite a household savings ratio which has plummeted in the same period is nothing to be concerned about. Artificially low interest rates orchestrated by the central bank, which disregarded the level of real resources available, were one of the key ingredients in this unholy mess and the rapid and unsustainable expansion of our banking system that Sir Mervyn decries. The regulatory interventions since the crisis by the Bank and by government to “save the economy” remind me of an arsonist returning to a blaze they started while posing as a fireman.

So the questions for Doug Casey are, what conditions are needed for there to be a healthy, growing economy and why is the model we have today a complete perversion of basic economics?

The way you become wealthy is by producing more than you consume, and by saving the difference… The net savings in society provide the capital to expand and develop new technologies.

Oh that simple? A growing economy based on savings and investment in productive enterprise. Unfortunately, the combination of what Jim Grant calls the “Phd standard” in monetary policy discouraging savings, an economic model which views spending cheap credit as the alpha and omega of economic growth, and successive governments taxing, borrowing and spending their way into bankruptcy is an aberration from Casey’s common sense approach. As he puts it:

The problem we have today is that there are no net savings in the Western World – it’s all debt. Trillions and trillions of dollars of debt, on most levels. And what that means is that we’ve been living out of capital accumulated by generations past, and we’re living out of projected future income.

Turning to the endless merry-go-round of boom and bust, in his view (and that of Austrian economists across the globe) business cycles are “created by the government’s debasement of the currency, which is called inflation”. The new money created to bring this about “causes people to do things that they otherwise wouldn’t.” Also, like debt, it “tends to make people think that they are richer than they are”. In this way, you can see that the present UK government’s policy of trying to reinflate the bubble caused by excessive consumer spending, a low rate of savings and an unsustainable credit boom is simply an attempt to sustain the illusion of prosperity.

Turning to the ongoing and seemingly never-ending crisis we are now experiencing, described as the “greater depression”, Casey establishes three broad definitions of a depression, the effects of which are experienced simultaneously.

The first, is a “period of time during which most people’s standard of living drops significantly”. So far, so horrible.

The second, is a period of time “when the business cycle climaxes”. Again, we’ve certainly had this part – all our chickens tried to come home to roost. Casey claims this would be entirely avoidable under a free market economic system, besides the odd fluctuation.

The third, and most important, depression is when “distortions and misallocations of capital are liquidated”, allowing the economy to recover and grow. Unfortunately, this is exactly what the various stimulus packages, bailouts, and subsidies have prevented from happening. The UK’s over-leveraged banks, overinflated asset and housing markets, a good deal of unviable businesses and a massively bloated service sector have all been allowed to shuffle on, soaking up capital that might be allocated towards more productive purposes and dragging the economy down under a mountain of debt.

In addition to this, the response to the crisis by “stupid governments all over the world, with their quantitative easing measures, are basically going to destroy their national currencies” and “destroy the savings of the middle class”, leading to a “sociological earthquake”. So the arsonist starts the blaze, returns dressed as a fireman, then begins spraying the fire with jet fuel. As it becomes a raging inferno, he tells everyone that it would have been much worse if they hadn’t acted.

If you weren’t already preparing to either kill yourself or hike off into the hills to live out a nomadic existence in the Highlands, to top it off Casey predicts more of the rioting seen in London and Vancouver in recent years as “people find that they aren’t going to be able to improve themselves” and turn violent. Just what everyone needed – a good riot and some overturned cars.

He describes the prevailing perception that government is a “magic cornucopia” that can “make everybody wealthy” or “raise everybody’s wages” as ridiculous, having nothing that it hasn’t stolen first from society as a whole. His disgust with attitudes to government and with government itself is palpable. National debts should be defaulted on for “moral reasons” and to avoid citizens being turned into “veritable serfs” to “repay a mortgage against future generations” that is completely unsustainable and in order to punish those that have financed an ever-expanding state.

Casey is particularly derisive of our dear Continent, describing Europe as “constipated, highly regulated, highly taxed”, going downhill since World War One due to the “wrong philosophical values” and shortly to become no more than a “petting zoo for the Chinese”. Unfortunately, it’s not just us as we are all in an “existential nightmare” with no way out, and the best you can do is “Hold onto your hat” as “we’re in for a wild ride”.